Thursday, February 26, 2009

Class Actions and Punitive Damages – Unconstitutional Together

Back when Philip Morris USA v. Williams, 549 U.S. 346 (2007), had just come down, we put up a post about the case being a death knell for the prosecution of punitive damages through class actions. We explained that the handwriting had been on the wall since State Farm Mutual Auto Insurance Co. v. Campbell, 538 U.S. 408, 416-417 (2003). Since Campbell there had been only a couple of outlier cases, one of those being Dukes v. Wal-Mart, Inc., 474 F.3d 1214, 1239 (9th Cir. 2007).

Last week we pointed out that the Ninth Circuit – taking its own sweet time about it – had agreed to rehear the Dukes decision en banc, something that’s pretty rare, especially in that circuit. Since even the Dukes panel had been uncomfortable with the class action-punitive damages issue, we could have the outliers whittled down to one, that being the West Virginia Supreme Court’s ducking the issue in State v. Madden, 655 S.E.2d 161, 167 (W. Va. 2007) (refusing to address question before there is a trial). Come to think of it, having the West Virginia Supreme Court duck an issue isn't the worst thing in the world.

With the reargument in Dukes, we think this would be a good time to go over the constitutional reasons why class actions and punitive damages can’t mix, since the defense side could be close to closing out this particular abuse of class actions for good - very good.

Going back to Campbell, the Supreme Court found constitutional error in allowing a punitive damages award made under a single state’s law to be based upon evidence of the defendant’s supposed sins all over the country. The conduct giving rise to punitive damages “must have a nexus to the specific harm suffered by the plaintiff,” which this sort of blunderbuss approach lacked. 538 U.S. at 422.

A defendant’s dissimilar acts, independent from the acts upon which liability was premised, may not serve as the basis for punitive damages. A defendant should be punished for the conduct that harmed the plaintiff, not for being an unsavory individual or business. Due process does not permit courts, in the calculation of punitive damages, to adjudicate the merits of other parties’ hypothetical claims against a defendant under the guise of the reprehensibility analysis.

Id. at 422-23. Since class actions, by definition, aggregate the claims of a large number of plaintiffs, they necessarily muddle the constitutionally-mandated “nexus” that the Supreme Court found essential in Campbell.

A class action approach to punitive damages was also at odds with the considerations in Campbell’s second prong – the ratio between a plaintiff’s compensatory and punitive damages. The constitutionally permissible ratio isn’t a fixed number, but rather a range that varies in any given case depending upon factors such as: if “a particularly egregious act has resulted in only a small amount of economic damages,” “the injury is hard to detect,” or “the monetary value of noneconomic harm might have been difficult to determine.” 538 U.S. at 425. Thus, as to the ratio factor, it’s determination “must be based upon the facts and circumstances of the defendant’s conduct and the harm to the plaintiff.” Id. This factor as well doesn’t seem at all amenable to the one-size-fits-all approach inherent in class actions.

But Campbell wasn’t enough to deter the district court in Dukes from certifying a punitive damages class in an employment discrimination case – and a whopper of a class it was, including more than a million people. Dukes, 474 F.3d at 1237. Not only that, the certification order explicitly precluded individual injury hearings, adopting instead a “formula approach” that permitted awards to both “potential victims” and “actual victims.” Dukes v. Wal-Mart, Inc., 222 F.R.D. 137, 184-185 (N.D. Cal. 2004). All this was just fine with the original Ninth Circuit panel:

Relying on [Campbell], [defendant] argues that a punitive damages award in the absence of individualized hearings would violate its due process rights because it might punish legal conduct and award damages to non-victims. However, [Campbell] is readily distinguishable from this case. [Campbell] involved an action brought on behalf of one individual under state law. Moreover,. . .there is no danger in this case that [defendant] will be punished for conduct that is legal where it occurred, because Title VII is a [uniform] federal law. . . . Caselaw supports the district court’s findings that substantive law does not mandate individualized hearings and that [defendant’s] Constitutional rights will not be violated if statistical formulas are employed to fashion the appropriate remedy.

Dukes, 474 F.3d at 1242.

Then along comes Williams, which establishes outright that punitive damages cannot be based on anything other than the defendant’s conduct towards a particular plaintiff. “We did not previously hold explicitly that a jury may not punish for the harm caused others. But we do so hold now.” Williams, 549 U.S. at 356-57. Thus, a class-wide determination of everybody’s punitive damages all a once is is precisely what Due Process prohibits. Indeed, while Williams did not itself involve a class action, the Supreme Court specifically held that punitive damages could not constitutionally be awarded on a “represent[ative]” basis:

[T]he Constitution’s Due Process Clause forbids a State to use a punitive damages award to punish a defendant for injury that it inflicts upon nonparties or those whom they directly represent, i.e., injury that it inflicts upon those who are, essentially, strangers to the litigation.

Williams, 549 U.S. at 343 (emphasis added).

Furthermore, Williams recognized a proposition that seems to shock the other side – that defendants have the right, a constitutional right, to defend themselves. “[T]the Due Process Clause prohibits a State from punishing an individual without first providing that individual with an opportunity to present every available defense.” Id. And it's clear from the Williams opinion that these constitutionally protected defenses include individualized inquiries such as a plaintiff’s knowledge (“knew that smoking was dangerous”) and reliance (“did not rely upon. . .defendant[]”). Id. In short, what the Due Process Clause requires for punitive damages cannot be squared with the “common issues” necessary to maintain a class action.

And there's more. Classwide punitive awards encompassing absent class members who never appear in court to pursue their claims are necessarily “standardless” and “speculative” in violation of Due Process:

To permit punishment for injuring a nonparty victim would add a near standardless dimension to the punitive damages equation. How many such victims are there? How seriously were they injured? Under what circumstances did injury occur? . . .The jury will be left to speculate. And the fundamental due process concerns to which our punitive damages cases refer – risks of arbitrariness, uncertainty, and lack of notice – will be magnified.

Id. (citations omitted). A jury therefore may not punish a defendant for harm to others – to the absent class members. Id. at 1064 (“a jury may not go further. . .and use a punitive damages verdict to punish a defendant directly on account of harms it is alleged to have visited on nonparties”).

Because class actions are inherently the sort of “representative” litigation that Williams holds cannot constitutionally be employed to pursue punitive damages, the defendant’s first motion for reargument in Dukes included the position that intervening Supreme Court authority required decertification of the punitive damages class. A slam dunk, right?

Wrong.

The panel granted reargument, but it's replacement opinion backpedaled furiously on the punitive damages aspects of the class, now perceiving only “possibilities” that were not concrete enough to bother discussing at all:

[T]he district court outlined a trial plan based, in large part, on how other courts have handled similarly large and complex class action suits. [Defendant] contend[s] that at least some aspects of this trial plan violate [its] due process rights. . . . At this pre-merits stage, we express no opinion regarding [defendant’s] objections to the district court’s tentative trial plan (or that trial plan itself), but simply note that, because there are a range of possibilities-which may or may not include the district court's proposed course of action-that would allow this class action to proceed in a manner that is both manageable and in accordance with due process, manageability concerns present no bar to class certification here.

In its first opinion, the majority explicitly approved of the district court’s trial plan in the face of the Due Process deprivations. In this second opinion, the majority “express[es] no opinion regarding [defendant’s] objections. . .and finds it sufficient to “note” that “there are a range of possibilities. . . .” [Defendant] has appealed precisely the unconstitutionality in the district court’s order, so it is incumbent uponus to correct it.

Id. at 1198 (dissenting opinion).

That was the state of play in Dukes before last week’s grant of en banc reargument. Given the panel’s reaction – trying to duck the Due Process issue in the face of Williams – they didn’t have a good answer to Williams back then. It’s unlikely that there’s any better answer now, since the only post-Williams precedent on whether punitive damages class actions may constitutionally be certified are two more holdings that such class actions are unconstitutional. In re Conagra Peanut Butter Products Liability Litigation, 251 F.R.D. 689, 701-02 (N.D. Ga. 2008); Nelson v. Wal-Mart Stores, Inc., 245 F.R.D. 358, 376 (E.D. Ark. 2007), although we note Cook v. Rockwell International Corp., 564 F. Supp.2d 1189 (D. Colo. 2008), in which class certification wasn’t the issue.

We’re old enough to remember the way drug and device litigation was before the decisions in Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), and Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999), essentially slammed the door on product liability/personal injury class actions. Before that, it was distressingly common for plaintiffs’ counsel to try to extort settlements with extravagant class actions, including demands for classwide punitive damages.

Those are not fond memories, so we’d like to see the stake driven firmly through the heart of the idea of punitive damages class actions once and for all. Thus, we offer these arguments to our colleagues on the defense side and recommend that they use and expand upon them whenever any plaintiff, in any kind of case, makes class action allegations that encompass a demand for punitive damages. If you win, let us know.

It's not hard to find the articles. Just go to Westlaw or Lexis and search for "punitive damages," "class action," and "due process" all in the same paragraph and you'll find them, although you'll have to sift through a couple of hundred hits. We just did that, and the first really thorough article we found is Sheila B. Scheuerman, “Two Worlds Collide: How The Supreme Court's Recent Punitive Damages Decisions Affect Class Actions,” 60 Baylor L. Rev. 880 (Fall 2008). There are undoubtedly many others, but they're probably cited in this one.

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This blog contains the personal views of the Blogging Team identified below (and of any authors of guest posts) concerning various topics that arise in the defense of pharmaceutical and medical device product liability litigation. Please read the DISCLAIMER about the nature of this blog, and understand that you are accepting its terms, before reading any of the posts here.

Blogging Team

James M. Beck is Counsel resident in the Philadelphia office of Reed Smith. He is the author of, among other things, Drug and Medical Device Product Liability Handbook (2004) (with Anthony Vale). he wrote the seminal law review article on off-label use cited by the Supreme Court in Buckman v. Plaintiffs Legal Committee. He has written more amicus briefs for the Product Liability Advisory Council than anyone else in the history of the organization, and in 2011 won PLAC's highest honor, the John P. Raleigh award. He can be reached at jmbeck@reedsmith.com.

Stephen McConnell has authored articles and chapters on product liability (though nothing as snappy or authoritative as Beck's book) and has tried drug and device cases that managed to evade the pretrial gauntlet. He is a partner in the Philadelphia office of Reed Smith and can be reached at smcconnell@reedsmith.com.

Michelle Hart Yeary is a seasoned products liability litigator who focuses on attempting to bring order to the chaos that is mass torts, concentrating on the practicalities and realities of defending coordinated and multidistrict litigation. She is counsel in the Princeton office of Dechert LLP and can be reached at michelle.yeary@dechert.com.

John J. Sullivan is a products liability and commercial litigator, having authored articles on mass torts and securities litigation and presented on trial advocacy. He is experienced in mass tort litigation, with a particular emphasis on scientific and regulatory issues, as well as having experience in complex commercial, securities class action and corporate governance litigation. He is a partner in the downtown Manhattan and New Jersey offices of Cozen O'Connor and can be reached at jsullivan@cozen.com.

Eric L. Alexander is a partner in Reed Smith’s Washington office. He has spent almost his entire career representing drug and device companies in product liability litigation from discovery through motions, trials, and appeals, usually on the right side of the v. He is particularly interested in medical and proximate cause and the intersection of actual regulatory requirements and the conduct that plaintiffs allege was bad, which covers quite a bit. He can be reached at ealexander@reedsmith.com.

Steven J. Boranian is a partner in Reed Smith’s San Francisco office, where he focuses his practice on representing drug and medical device companies in product liability and other kinds of litigation. He has handled drug and device matters from pre-litigation demands to appeals and all points in between, with particular interests in “mass” proceedings and class actions, to the extent the latter should ever be allowed in the drug and medical device context. He can be reached at sboranian@reedsmith.com.

Rachel B. Weil is counsel in Reed Smith’s Philadelphia office. Except for a brief, misguided trip to the “dark side,” Rachel has spent her whole career defending drug and device manufacturers in product liability litigation and in government actions arising from such litigation. While she laments the single-plaintiff drug cases of her youth, she loves nothing better than a good mass tort. She can be reached at rweil@reedsmith.com
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